What is a guarantor on a loan?

26 Nov 2018

Being a guarantor for a loan essentially means providing back up for a lender if the borrower fails to make repayments. Loan guarantor responsibilities are serious and anyone considering agreeing to be a guarantor should have a good understanding of what’s involved. If you’re a borrower then having someone who is willing to be your guarantor can make the difference between being accepted and rejected by a lender.

What does a guarantor do?

Getting a loan with a guarantor is often easier than without. That’s especially so for borrowers without a perfect credit history. A guarantor agrees to step in to the borrower’s obligations if they are not able to meet them. So, when repayments become due on a loan, if the borrower misses those repayments, the guarantor will make them instead. From a lender’s point of view this makes a borrower less risky, which is why guarantor loans are well suited to people who have bad credit. If the original borrower continues to make repayments on the loan then the guarantor won’t have to do anything – it’s only if repayment problems arise that the guarantee is activated.

Key questions about guarantors for borrowers

Who can be a guarantor for a loan? Anyone who is over the age of 18 with a positive credit history. Guarantors will usually be required to show that they have the resources to make repayments on the loan if the borrower is not able to.

Does a guarantor have to be a homeowner? It depends on the lender. Some lenders won’t consider a guarantor who is a tenant but others are fine with it. Lenders often prefer a guarantor who is a homeowner because this provides the lender with security. If neither the borrower nor the guarantor can repay the loan from their income, the guarantor’s property can be used instead.

Are there any other limits on who can be a guarantor for a loan? Individual lenders have their own requirements. For example, a lender may not accept a guarantor who is the lender’s spouse. Or the minimum age with the lender may be 21, not 18. Some lenders won’t consider a guarantor who is not in full time employment.

When do guarantors have to start making payments? A lender will usually give the borrower some time to pay before chasing a guarantor. However, this may only be a month or so. There are circumstances in which this may happen much sooner, for example if the borrower dies.

If you can’t find a guarantor for a loan then try asking family members and close friends who know and trust you. Be honest and open about your financial position and provide evidence, where possible, of your ability to make the repayments on the loan on time.

Being a guarantor

If you are considering being a guarantor you should be sure that you have the resources to make the repayments on the loan. Otherwise this may affect your credit score and you could end up with fees and charges to pay as a result.

The biggest risks for a guarantor. If you agree to guarantee a loan for a friend or family member the biggest risk is that they may not be able to make the repayments and so you may have to do so. Make sure that you can cover all the loan repayments – including interest – if the worst does happen.

Questions to ask about the borrower. Do you trust them? Do you know that they will do their best to make the repayments on the loan? Do you know enough about their current financial position to make an assessment of whether or not the risk of being a guarantor is worth it for you?

How to get out of being a guarantor on a loan. Essentially, you can’t. Once you have agreed to be a guarantor you are committed to covering the borrower’s repayments if they are not able to.

Guarantors and credit reports. If you agree to be a guarantor this won’t show up on your credit report. Most lenders will carry out a credit check to ensure a guarantor doesn’t have a history with bad debt but this won’t usually appear in a credit report. However, if you have to take over repayments on the loan and you default, this will affect your credit history as if it were your own loan.

When is a guarantor for a loan a good idea?

Where there is no credit history i.e. the person applying for the loan has never borrowed before and so the lender can’t see whether they are a credit risk or not

For anyone who has had problems with borrowing in the past, such as defaults

If the person making the application has a low credit score for whatever reason

Where someone already has debt and a lender won’t consider an application without a guarantor

For anyone looking to improve a credit score by borrowing and repaying on time

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If you are thinking of consolidating existing borrowing you should be aware that you may be extending the terms of the debt and increasing the total amount you repay. Missing payments on a loan will have severe consequences and may make obtaining credit more difficult in the future.